IBC Cannot Be Used As Recovery Mechanism To Resolve Contractual Disputes: NCLAT Reaffirms

The National Company Law Appellate Tribunal (NCLAT) at Delhi has reiterated that insolvency proceedings under the Insolvency and Bankruptcy Code cannot be used as a recovery mechanism to settle disputed contractual claims.

A coram comprising of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra dismissed an appeal filed by FTI Consulting India Pvt. Ltd. against the rejection of its CIRP plea against MGF Developments Ltd.

The appellate tribunal held that insolvency proceedings are meant to address clear cases of default and not to adjudicate contractual disputes.

“Proceeding under Section 9 are proceedings for initiation of insolvency against a Corporate Debtor who fail to make payment after receipt of demand notice provided notice of dispute has not been given by the Corporate Debtor. Section 9 proceeding are not proceeding where contractual dispute between the parties for payment of fee or services can be examined and adjudicated. Present is not a case where claim raised by the Appellant is admitted by the Respondent.”, it said.

The dispute began with an engagement of FTI Consulting by MGF. It was hired to provide expert services in an ICC arbitration in London. The arbitration involved claims relating to Emaar MGF Land Limited. The parties signed an agreement on February 26, 2020. The work was divided into four phases. The agreement named Montek Mayal, a senior FTI executive, as the primary expert witness.

After Mayal left FTI, MGF Developments hired Osborne Partners. This was done under a fresh agreement. FTI, meanwhile, continued to raise invoices under the original engagement. MGF made substantial payments against these invoices. Later, FTI issued a demand notice. It claimed an outstanding amount of USD 367,353.29.

MGF replied on July 25, 2024. It disputed the demand. It said the agreement was built around Mayal's involvement. According to MGF, the contract was frustrated once he exited FTI. It claimed no further sums were due. It also alleged duplication of services. It pointed to the large amounts already paid.

Despite this reply, FTI filed a Section 9-CIRP application under the IBC. The National Company Law Tribunal rejected the plea. It held that the dispute was commercial in nature. It added that the insolvency process cannot be used as a recovery tool. FTI thereafter carried the matter in appeal before the NCLAT.

In the appellate proceedings, it maintained that Mayal's exit did not affect its capacity to perform the contract and that no pre‑existing dispute existed at the time the demand notice was issued. It further assailed the finding that the controversy fell outside the scope of the insolvency regime.

The NCLAT examined whether MGF's reply to the demand notice could be regarded as a valid “dispute” under Section 8(2) of the IBC. Placing reliance on the Supreme Court's decision in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., it reiterated that the adjudicating authority is required only to ascertain the existence of a genuine dispute, and not to assess the ultimate merits of the defence.

“So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”,” the tribunal observed.

It found that MGF had raised detailed objections regarding performance of services after Mayal's departure, alleged overlap of work with Osborne Partners, payments already made, and frustration of contract under Section 56 of the Indian Contract Act.

Rejecting FTI's assertion that there was no prior dispute, the tribunal pointed out that all the issues raised by MGF clearly pre‑dated the demand notice and were not an afterthought. It reiterated that, as a matter of settled law, the insolvency process is not meant to be used as a forum for resolving ordinary contractual disagreements.

The tribunal also placed reliance on SS Engineers v. HPCL, and observed that a Section 9 application can be entertained only where the operational debt is not in dispute. If there is a genuine and substantial dispute on liability, the proper course is to dismiss the application.

In the result, the NCLAT dismissed the appeal and held that the NCLT had not committed any error in rejecting FTI's Section 9 petition.

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